Kiplinger Energy Outlook: Gas Prices Up on Middle East Conflict

Oil prices are likely to stay elevated as long as Israel and Iran are exchanging fire.

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After holding relatively steady near $60 per barrel for most of the spring, benchmark West Texas Intermediate (WTI) crude oil got a jolt last week when Israel launched punishing air strikes on Iran’s military leadership and nuclear facilities. WTI recently traded near $73 per barrel, and could go higher still if the fighting intensifies. The market’s main concern is the risk that Israel could target Iran’s oil export facilities, or that Iran could try to close the Strait of Hormuz to oil tanker traffic. That narrow waterway, which connects the Persian Gulf to the Arabian Sea, is vital to global oil shipments. About a fifth of the world’s petroleum passes through the Strait each day, much of it from Saudi Arabia. If Iran targets tankers passing close to its shores, that massive flow of oil could be temporarily cut off, sending prices toward $100 per barrel.

Even if the situation in Iran does not worsen, drivers can expect to see prices at the gas station turn higher. The national average price of regular unleaded hit $3.17 per gallon today. That’s down from a year ago, but up about a nickel from a week ago. Look for prices to near $3.25 at minimum in the coming days. If oil prices spike sharply because of the situation in the Middle East, gas could quickly threaten $4 per gallon. Diesel, now averaging $3.57 per gallon, will also rise at least a dime or so in the near term, and could break $4 in the event of a sharp rise in oil prices.

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The price of natural gas is also rising, but that has more to do with the weather in the U.S. than with conflict in the Middle East. Forecasts showing a heat wave for much of the eastern half of the country signal that gas consumption will soon be heavy, as power plants work hard to keep air conditioners running. Gas is the largest source of power generation in the U.S., and utilities will be burning plenty of it as temperatures near and surpass 100 degrees in some areas. The benchmark gas futures contract recently traded at $3.86 per million British thermal units, up modestly from recent weeks. It could easily rise above $4 if the hot trend persists.

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Jim Patterson
Managing Editor, The Kiplinger Letter

Jim joined Kiplinger in December 2010, covering energy and commodities markets, autos, environment and sports business for The Kiplinger Letter. He is now the managing editor of The Kiplinger Letter and The Kiplinger Tax Letter. He also frequently appears on radio and podcasts to discuss the outlook for gasoline prices and new car technologies. Prior to joining Kiplinger, he covered federal grant funding and congressional appropriations for Thompson Publishing Group, writing for a range of print and online publications. He holds a BA in history from the University of Rochester.